FIN658

FINANCIAL STATEMENT ANALYSIS (FSA)

Chapter 4 FINANCIAL STATEMENT ANALYSIS TOOLS

STATEMENT OF CASH FLOWS

Questions on CF statement and

analysis: part A all PYQ

PYQ part B: Jun 16-Q3 (BCG

Matrix), dec14-part B (Q2),
(DEC16-PARTB(Q1), JULY17-Q6
 STATEMENT OF CASH FLOWS
LESSON OUTCOMES
At the end of the lesson, students should be able to:

1. Define statement of cash flows, and the three major

activities; operating, financing and investing.

2. Construct statement of cash flows using the indirect

method

3. Analyzing company’s cash flows

 STATEMENT OF CASH FLOWS defined

Statement that reports a firm’s cash inflows and

outflows for a period.

Cash flows statement classified the sources and uses of funds

into three major business activities: OPERATING Activities,
INVESTING Activities and FINANCING Activities.

The sum of the cash flows from the three activities

explains the increase or decrease in the firm’s cash
over a period of time.
Cash flow analysis
► It provides an insight into how a company is
obtaining financing (sources) and deploying its
resources (uses).

► A detailed and concise analysis of cash flows

would require a strong knowledge of a company’s
business environment and strategies.
 Statement of cash flows consists
of company’s 3 main activities:

Operating Investing Financing

Let’s see the definition of each activity,

which we have already discussed before this,
in chapter 1. Hope that you still remember
5
Financing activities
► are the methods to raise fund using internal and
external sources

► include obtaining resources (fund, capital) from

shareholders (equity) and creditors (debt)

► Example: Inflows: issuance of new securities; obtaining loan

► Outflows: repayment of debt, repurchase of shares, dividends

payment
 Investing activities
► Company’s acquisition and maintenance of investment for business
transaction and for the purpose of excess cash.

► refers to company’s capital expenditures that can be classified into

investment in financial assets and operating assets that are expected to
generate revenues in the future.

► Example: Inflow: Sales of property & equipment, sales of equity

investments, sales of business

► Outflow: Purchases of property & equipment, purchases of equity

investments, purchases/acquisition of business
 Operating activities

► the main activities to derive earnings.

► They encompass, all the income and expense items
found on the income statement, all the net inflows
and outflows of cash that operations impose on the
enterprise.

► Examples: cash paid for purchase of inventories, cash

receipt from customers, salaries& wages, selling &
administrative expenses.
►Most important activity is OPERATION
OPERATION –main business which generate profit, the
reason why a company exist. Without operation,
means it is a dormant company

While FINANCING & INVESTMENT are to support

OPERATION
Thus, it is important for a firm to generate a
positive operating cash flow(OCF)
What about negative OCF..? is it BAD…?
Source: DIALOG GROUP BHD ANNUAL REPORT 2020
Source: DIALOG GROUP BHD ANNUAL REPORT 2020
Preparing CF statement

► There are two methods can be used in preparing

CF statement: direct and indirect method.
► both ways will give the same of end results.

► BUT FOR THIS CLASS, WE WILL ONLY

FOCUS ON INDIRECT METHOD OF CASH
FLOW STATEMENT
 Preparing CF CASH FROM OPERATIONS
statement
CASH FROM INVESTMENT

Change in cash or net cash flow

(NCF) can also be calculated from CASH FROM FINANCING
ending cash in Balance Sheet:
end cash Year 1 (–) end cash Year 0
CHANGE IN CASH (+/-) FOR THE YEAR
Also known as net cash flow (NCF)

For example, NCF year 2020 = ending cash2020 – ending cash 2019
Steps in Preparing CF statement

STEP 1 STEP 3
Calculate the
STEP 2
differences in To classify To classify
all balance items under STEP 4
items
sheet items
according to Operating, To prepare
(prepare year to Investing and Cash Flow
year change, in SOURCES and Financing
absolute sum statement
USES of fund. Activities.
ringgit value)
INDIRECT METHOD
Flow of the statement under indirect method:
Start with Net income,
(+) depreciation & amortization expenses
+/- gains (losses) on sales of assets
+/- cash generated and cash used by operating current assets
& liabilities
= net CF from operating activities (OCF)

OCF, then add with investing CF (ICF) & financing CF (FCF) equals to NCF
To classify changes in balance sheet as SOURCES

❖ Any DECREASE in ASSETS (excluding Cash) Such as decrease in AR,

inventory
❖ Any INCREASE in LIABILITIES: For instance, Increase in AP,
borrowing, accruals
❖ Any INCREASE in EQUITY: Increase in shares, paid in capital

Note: ignore the change in cash, retained earnings and fixed assets as
source or use
To classify changes in balance sheet as USES
❖ Any INCREASE in ASSETS (excluding Cash)
e.g. increase in AR, property, plant & equipment (PPE), net capital
expenditure (NCE)

❖ Any DECREASE in LIABILITIES: e.g., Decrease in AP, borrowings,

accruals
❖ Any DECREASE in EQUITY – e.g. repurchase of shares
❖ Dividend payment

Note: ignore the change in cash, retained earnings and fixed assets as
source or use
 To classify changes in
balance sheet as
SOURCE (S) & USE (U)

A A

L
&
S U L
&
E
E
Note: ignore the change in cash, retained earnings and net fixed assets
(NFA) as source or use

Change in cash is used to check the amount of net cash flow (NCF)

Change in retained earnings is used to calculate dividend payment

Change in fixed assets is used to calculate net capital expenditure (NCE)

Change in retained earnings (RE) is used to calculate dividend payment
❖ Retained earnings increase by amount of net income and
reduced by amount of dividend paid.
↓
❖ Dividend payment is classified under FINANCING activity (FCF)
Dividend payment = current year’s net income (-) change in RE

For example: Dividend year ‘20 = net income ‘20 (–) change in RE
= EAT ‘20 – (RE’20 – RE’19)
Change in net fixed assets (NFA) is used to calculate net
capital expenditure (NCE)

NCE explains how much firm spent for investing in new fixed
assets. NCE is classified under INVESTING (ICF).

NCE = change in NFA (+) current year’s Depreciation

e.g. NCE year 20 = change in NFA (+) Depreciation 20
= (NFA20 – NFA19) + Depreciation 20
Change in fixed assets (NFA) is used to calculate net capital
expenditure (NCE)

Note: If the gross amount of fixed assets is provided in the

balance sheet, we don’t have to calculate the NCE, just
take up change in gross fixed assets as NCE.
Cash Flow analysis – a guideline

The analysis should have four elements of cash which are:

1. NCF, change in cash (decrease or increase for the year)
2. Cash from operation
3. Cash from investment
4. Cash from financing
→ identify major uses & sources; which activity contributed most
or used most of the cash.
Cash Flow analysis – a guideline

❖ The analysis may start with explanation on each activity (O,I,F)

and concluded by NCF (rise or drop)
OR…

❖ we may start with NCF (rise or drop) and followed by reasons

from each activity (O,I,F)

❖ We can support the CF analysis with other tools like ratios,

common size, or comparative statement
Answer for selected PYQs

DEC19 JUN19 DEC18

(deferred
tax liability
as OCF)
OCF 1,429,360 (2,661,824) (7,794,000)
ICF (59,000) (3,375,400) (16,573,000)
FCF (1,327,360) 6,182,702 25,053,000
NCF 43,000 145,478 686,000
Answer for selected PYQs

June19-Part A 1(C) –sample of analysis

• Analysis
• Grand ICT cash for the year 9.89% higher than the base year. The positive net cash is contributed by
net inflows from financing activities. The cash uses mainly by investing and operating activities.
• OCF
• Despite the fact that sales revenue increase, its net profit decrease overtime from base year.
Accounts receivable rose substantially by 88.78% indicating high amount of uncollected debt from
customers. In addition, its unsold inventories also increased. The firm also make payment on its
accounts payable as well accrual expenses. This factors contributed to the deficit in operating cash
flow. The negative cash from operation show that the company is not managing its business well.
(have to add figures where necessary)
•
• ICF
• NOTE: NET CAPITAL EXPENDITURE NCE also can be written as fixed assets purchased
• RM3,047,400
Answer for selected PYQs

June19-Part A 1(C) –sample of analysis

• Analysis
• The company spent huge amount in purchasing fixed assets, in order to support growing
demand as reflected by sales revenue. The company also invest more in marketable
securities, in order to earn a greater investment return in the future. There was no cash
inflows, and resulted with net cash outflows for investing activities. (have to add figures
where necessary)
•
• FCF
• The financing activities generate a surplus cash for the year worth RM… showing that the
cash sources are greater than its uses. The company raise fund by issuing new stocks
amounted RM..meanwhile it make payment on part of long term debt and paid dividends
to its shareholders. (have to add figures where necessary)
CF STATEMENT-DIRECT METHOD

► The direct and indirect methods only differ in

preparation of cash flows from operating
activities.
► The format for computing cash from financing &
investing activities is the same for both methods.
Direct method
CF from operating activities.

Cash flows are divided into few sections

1. Cash payment for inventories

2. Cash paid to employees (salary expenses)
3. Cash paid for operating expenses
4. Taxes paid
5. Interest paid
Equals net cash provided by (used in) operating
activities
Direct method
CF from operating activities.

► Generally, OCF can be divided into 3 sections

1. Cash receipt from customers
2. Cash payment for inventories
3. Cash paid for operating expenses

Note: Only if we have enough info regarding salaries,

interest and taxes, we would be able prepare all the 6
items.
Cash receipts from customers:

► Net sales per the income statement

► Plus beginning balance in accounts receivable
► Minus ending balance in accounts receivable
► Equals cash receipts from customers
Cash payments for inventory:

► Ending inventory
► Minus beginning inventory
► Plus beginning balance in accounts payable to vendors
► Minus ending balance in accounts payable to vendors
► Equals cash payments for inventory
Cash paid to employees:

► Salaries and wages per the income statement

► Plus beginning balance in salaries and wages payable
► Minus ending balance in salaries and wages payable
► Equals cash paid to employees
Cash paid for operating expenses:

► Operating expenses per the income statement

► Minus depreciation expenses
► Plus increase or minus decrease in prepaid expenses
► Plus decrease or minus increase in accrued expenses
► Equals cash paid for operating expenses
Taxes paid:

► Tax expense per the income statement

► Plus beginning balance in taxes payable
► Minus ending balance in taxes payable
► Equals taxes paid
Interest paid:

► Interest expense per the income statement

► Plus beginning balance in interest payable
► Minus ending balance in interest payable
► Equals interest paid

End of slides
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